Al­most in a per­fect storm

Sars is clos­ing in on wealthy tax­pay­ers with undis­closed off­shore as­sets, as well as multi­na­tion­als that try to game the sys­tem, but the fact re­mains that the heav­i­est bur­den falls on in­di­vid­ual tax­pay­ers. How much longer can they stand it?

Financial Mail - Investors Monthly - - Budget 2017 - Stafford Thomas thomass@fm.co.za

Fi­nance min­is­ter Pravin Gord­han dished up a tough bud­get. But it still leaves the SA Rev­enue Ser­vice with the daunt­ing task of rak­ing in an ad­di­tional R121bn in gross tax re­ceipts.

It is a big ask in an eco­nomic en­vi­ron­ment where tax col­lec­tion re­mains an up­hill bat­tle. Re­flect­ing this are pre­lim­i­nary fis­cal 2016/2017 figures re­leased by na­tional trea­sury, which re­veal that tax col­lec­tions of R1.144 tril­lion fell R30bn (7%) short of the R1.174 tril­lion tar­geted in the bud­get speech Gord­han de­liv­ered in Fe­bru­ary last year. The short­fall was also higher than the es­ti­mate of R23bn con­tained in the medium-term bud­get pol­icy state­ment in Oc­to­ber.

It was a re­peat of tax re­ceipt short­falls in the two pre­vi­ous fis­cal years. In 2015/2016 tax col­lec­tions came in R11.6bn (1.1%) short of the R1.081 tril­lion first bud­geted, while in 2014/2015 tax col­lected fell R14.65bn (1.5%) short of the R979bn tar­geted.

In fis­cal 2017/2018 Gord­han is look­ing to per­sonal taxes to do the heavy lift­ing, with re­ceipts tar­geted to rise by a huge R56bn to R482bn. It places a heavy bur­den on a very small tax base in which just over 1m in­di­vid­u­als earn­ing more than R350,000 an­nu­ally ac­count for 77% of per­sonal taxes, ac­cord­ing to na­tional trea­sury data for 2015.

Gord­han has taken an al­most dra­co­nian ap­proach, in­clud­ing hik­ing the max­i­mum mar­ginal tax rate on in­di­vid­u­als and trusts to 45%. Bracket creep re­lief was also lim­ited to a miserly R2.5bn, a mere 0.5% of to­tal per­sonal tax re­ceipts bud­geted for.

Ernie Lai King, head of tax­a­tion and AfricaAsia prac­tices at Ho­gan Lovells SA, is con­cerned about the tax bur­den on in­di­vid­u­als. “It raises a se­ri­ous ques­tion,” he says. “What is go­ing to hap­pen with tax moral­ity?”

One thing is cer­tain: Sars will more than ever be on the hunt for tax­pay­ers bent on evad­ing tax. It has the re­sources to do so.

“Au­to­ma­tion (eFil­ing) is al­low­ing Sars to ap­ply far more dili­gent en­force­ment,” says Mike Teuchert, na­tional head of tax­a­tion ser­vices at Mazars. “Sars’s sys­tems are work­ing ef­fi­ciently and en­abling them to do a lot more risk anal­y­sis and data min­ing of tax re­turns.”

Sars’s rev­enue col­lec­tion unit is also on the hunt for tax dodgers. “It is well or­gan­ised and far more dili­gent in per­form­ing au­dits,” says Teuchert. “They are able to delve into trends and av­er­ages to iden­tify tax­pay­ers who should be au­dited.”

Un­in­ten­tional er­rors made by tax­pay­ers can also land them in trou­ble. In the case of de­duc­tions claimed on a tax re­turn, if Sars re­quests ver­i­fi­ca­tion it now sends the re­quest to the tax­payer’s on­line eFil­ing pro­file with no back-up through e-mail or con­ven­tional mail. Miss a Sars re­quest and it will dis­al­low the de­duc­tion.

“An eFil­ing pro­file is hardly some­thing most tax­pay­ers will be mon­i­tor­ing on a reg­u­lar ba­sis,” says Teuchert.

Sars is also hot on the heels of high net worth in­di­vid­u­als (HNWI) with undis­closed off­shore as­sets. Un­der a short-term amnesty it has given them un­til Au­gust 31 to come clean. “Sars has al­ready re­ceived dis­clo­sures of R3.8bn in for­eign as­sets, which will yield rev­enue of about R600m,” Gord­han noted ju­bi­lantly in his bud­get speech.

It is prob­a­bly only the tip of the ice­berg. “I would say there are stag­ger­ing sums of undis­closed off­shore as­sets,” says An­drew Well­sted, head of tax at Nor­ton Rose Ful­bright.

Sars is likely to go in guns blaz­ing. It will be armed with the Au­to­matic Ex­change of

In­for­ma­tion Treaty, an ini­tia­tive of the Or­gan­i­sa­tion for Eco­nomic Co-op­er­a­tion & De­vel­op­ment (OECD) which comes into force in June. It will en­able Sars to share in­for­ma­tion about HNWI for­eign as­sets and bank ac­counts across tax au­thor­i­ties in over 60 coun­tries.

If a tax­payer was un­der in­ves­ti­ga­tion in one tax ju­ris­dic­tion, tax au­thor­i­ties in other ju­ris­dic­tions would have no al­ter­na­tive other than to pro­vide in­for­ma­tion re­quired, Gord­han said.

Well­sted says: “Peo­ple with ir­reg­u­lar off­shore struc­tures are run­ning out of time fast.”

They can ex­pect no help from fi­nan­cial in­sti­tu­tions, which are now obliged to keep records and com­ply with due dili­gence re­quire­ments. The first re­port­ing pe­riod for fi­nan­cial in­sti­tu­tions ends on Tues­day, with re­turns due in June.

“In­sti­tu­tions are now po­ten­tially on the line if a client is ex­posed con­cern­ing ir­reg­u­lar ac­tions,” says Well­sted.

Com­pared with in­di­vid­ual tax­pay­ers, com­pa­nies have come off lightly in the 2017/2018 bud­get. Their to­tal con­tri­bu­tion to the tax cof­fers is bud­geted to rise by only R5.8bn (6.6%) to R218.69bn.

But on pa­per at least Sars has an­other means of ex­tract­ing far more com­pany tax. The po­ten­tial source is multi­na­tion­als that in­dulge in profit shift­ing to the most ben­e­fi­cial tax ju­ris­dic­tions with the re­sul­tant loss of tax in­come (base ero­sion) by coun­tries where they earn their prof­its.

At the heart of base ero­sion and profit shift­ing (BEPS) is trans­fer pric­ing. A com­plex area, trans­fer pric­ing be­tween units of a multi­na­tional com­pany in dif­fer­ent coun­tries should be done at arm’s-length pric­ing, as would be the case when trad­ing with an­other un­re­lated com­pany. In re­al­ity, in­tra­com­pany trans­fer pric­ing is open to a mul­ti­tude of abuses.

Ac­cord­ing to the OECD, tax rev­enue losses glob­ally from BEPS are con­ser­va­tively es­ti­mated at US$100bn-$240bn an­nu­ally, or any­where from 4%-10% of global com­pany in­come tax rev­enues.

To its credit Sars has been at the fore­front of in­ter­na­tional co-op­er­a­tion on com­bat­ing BEPS since the for­ma­tion in July 2013 of the BEPS ac­tion plan un­der the aus­pices of the OECD. Sig­na­to­ries to the ac­tion plan will be­gin ex­chang­ing in­for­ma­tion next year, which will pro­vide Sars with ac­cess to coun­try-by-coun­try in­for­ma­tion on all large multi­na­tion­als op­er­at­ing in SA.

Sars is al­ready on the move, re­quir­ing doc­u­men­ta­tion from multi­na­tion­als on any trans­fer pric­ing ac­tion of over R100m.

But whether Sars has the hu­man re­sources to com­bat trans­fer pric­ing abuse ef­fec­tively and garner more tax in the process is un­clear.

“Trans­fer pric­ing is re­source heavy in terms of skilled staff re­quired,” says Well­sted. “You need skilled peo­ple to sift through data and to ap­ply it.”

Lai King also has reser­va­tions. “Ques­tions are be­ing asked about the avail­abil­ity of skills at Sars. It has lost some top peo­ple in the trans­fer pric­ing unit to the pri­vate sec­tor,” says Lai King.

The loss of Nis­hana Go­sai and Su­nita Manik to in­ter­na­tional law firm Baker & McKen­zie in Septem­ber last year ap­pears to have been par­tic­u­larly dam­ag­ing.

Go­sai was the SA rep­re­sen­ta­tive on trans­fer pric­ing at the OECD and is a cur­rent serv­ing mem­ber of the UN’s sub­com­mit­tee on trans­fer pric­ing. Manik was the only African mem­ber of the OECD’s BEPS Bureau and Com­mit­tee on Fis­cal Af­fairs and was closely in­volved in the cre­ation of a new in­ter­na­tional tax frame­work.

But even if Sars can nail some big prof­it­shift­ing cases, snatch some more tax from HNWI tax­pay­ers’ off­shore as­sets and ex­tract more from er­rant PAYE tax­pay­ers, it is un­likely to pro­vide the real so­lu­tions to SA’s tax rev­enue chal­lenge.

“SA is near the end of the road on what can be done to ex­tract much more by way of tax from the econ­omy,” says econ­o­mist Mike Schüssler. “SA is al­ready one of the world’s most highly taxed coun­tries when mea­sured in terms of GDP.”

In­deed it is, with Sars re­veal­ing that it ex­pects to­tal tax re­ceipts in 2017/2018 to equate to 26.7% of SA’s GDP.

The World Bank ranks SA as the eighth­high­est tax-pay­ing na­tion based on a pro­por­tion of GDP. The world av­er­age is 14.8% of GDP.

Lai King shares Schüssler’s con­cern. “There is only so much blood you can get out of a stone. We are al­most in a per­fect storm.”

Gord­han is hint­ing at a pos­si­ble in­crease in the Vat rate. “If they do that you will know they have reached the bot­tom of the bar­rel,” says Lai King.

Ernie Lai King: what is go­ing to hap­pen to tax moral­ity?

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